The Oil Rally Is Helping Renewables

By:
Baystreet Staff - Thursday, February 01, 2018

It may sound counterintuitive, but higher crude oil prices have proved to be a boon for the renewable energy industry, at least when it comes to adoption of clean energy solutions and products—notably electric cars. This year, thanks to the oil price rally, EVs, solar and wind power will continue to grow, according to the latest outlook from Bloomberg New Energy Finance.

Falling costs of lithium-ion batteries will be the driver behind greater EV adoption, BNEF’s chief editor Angus McCrone notes in the report. Costs will be falling for wind and solar installations, too, thanks to tech advancements and to the successful application of economies of scale.

But lower costs for batteries are not the only thing spurring on EVs, of course. The oil price rally is making EVs more competitive against vehicles running on internal combustion engines. This makes sense, and one might speculate that the effect will be particularly marked this year, as gasoline prices jumped rather quickly, and drivers are averse to this kind of price shock.

But we might just as easily speculate that most EVs are not yet truly competitive with ICE cars on things like range, recharging infrastructure, and other performance metrics that drivers care about. EV adoption will probably increase this year, but it’s still too early for them to become mainstream.

In an earlier update, BNEF analysts estimated that battery costs had fallen by as much as 24 percent last year—an impressive figure indeed. They also predicted that EVs would advance enough on the cost front to start undercutting ICE vehicles by the mid to late 2020s. This target is evidence that the EV revolution will undoubtedly be a slow one.

It could be slowed down additionally by higher raw material prices for batteries. Prices for cobalt, lithium, even little-known vanadium, which is also used in lithium-ion batteries, have been soaring and they will continue to soar as market players worry about imminent shortages.

Moving on to wind and solar: BNEF’s analysts believe these industries will face some strong headwinds in the cost department. Wind and solar installations are capex-intensive projects, the analysts note, and the Fed’s planned rate hikes this year could have an adverse effect on them.

A 30-percent tariff on Chinese PV modules is also believed by some to be a threat to the solar industry, but there is certainly no consensus in this respect. In fact, some experts argue that the effects of the tariff on the U.S. solar industry will, in the long run, be negligible. In the short term, however, lack of access to cheap Chinese modules will likely drive up costs, offsetting the effects of technological improvements either partially or wholly.

Yet the extent of cost reduction in wind and solar cannot be underestimated. According to BNEF, this year total investment in these globally will remain generally flat on 2017, at $333.5 billion. But there will be more new capacity installed thanks to these lower costs. Over 100GW of new solar capacity will come on stream this year, along with 59GW of new wind capacity. Whether this will be enough to bring the world closer to hitting the Paris Agreement targets of slowing down the rate of global warming to 2°C remains an open question; last year there were warnings that investment in renewables needs to jump considerably if the target is to be met.